Question

Question 3 [36]

Rapid Print CC is a company specialising in 3D printing for commerce and industry. The management committee is considering adding an additional 3D printer to its production facilities and is considering purchasing one of two suitable 3D printers available for their purposes. Both printers, LaserX and 3Dpro, are under consideration. The printing manager and the financial manager can expect a minimum return of 10% per annum from either printer. The acquisition price for LaserX is R350 000 and for 3Dpro it is R600 000. They have also prepared the following expected net cash flows for the expected 4-year life span of the two printers:

LaserX                3Dpro

80 000                150 000

100 000               250 000

150 000               275 000

180 000               300 000

Required

Show all calculations.

3.1. Calculate the net present value (NPV) for both printers and the internal rate of return (IRR) for LaserX. The IRR for 3Dpro = 20%. It is recommended that you use 22% as an alternative cost of capital for LaserX. (29)

3.2. Recommend to Rapid Print’s management which printer they should consider purchasing, providing specific reasons for your recommendations.

Answer 1

3.1 Calculation of NPV

This is a time value of money sum, wherein cash inflows and outflows are occurring at various point in time.

For discounting of present value, we will consider 10% interest rate, which is the minimum return expected from the printer.

NPV will be calculated as follows:

Laser X

Year	Cash Flow	Discounted Cash flow @ 10%
0	-350000	-350000
1	80000	80000/ (1.1)2 = 72727.27
2	100000	82644.63
3	150000	112697.20
4	180000	122942.4

NPV = 41,011.54

3D Pro

Year	Cash Flow	Discounted Cash flow @ 10%
0	-600000	-600000
1	150000	136363.60
2	250000	206611.60
3	275000	206611.60
4	300000	204904

NPV = 154490.80

IRR for Laser X printer:

With trial and error by matching outflows and inflows, IRR will be 15% for Laser X

3.2 We recommend purchase of 3D pro printer as it has better NPV and higher IRR than laser X printer. Hence the investment will yield better returns.